Consumer Credit Surges as Cash-Strapped Americans Grab Plastic

Consumer credit growth rates reached 60% in September on a surprising surge in credit card debt, just as fears of an interest rate hike are causing credit to get more expensive.

Total revolving debt in the United States rose by 8.7% year-over-year in September after rising just 5.3% in August. September’s unusually sharp rise in credit usage surprised forecasters, who had expected 2015’s moderate pace of about 5.5% growth in revolving debt to sustain itself, or moderately increase.

Consumer credit growth rates reached 60% in September on a surprising surge in credit card debt, just as fears of an interest rate hike are causing credit to get more expensive.

Total revolving debt in the United States rose by 8.7% year-over-year in September after rising just 5.3% in August. September’s unusually sharp rise in credit usage surprised forecasters, who had expected 2015’s moderate pace of about 5.5% growth in revolving debt to sustain itself, or moderately increase.

In total, outstanding revolving debt in the United States rose to $925.2 billion in September, up from $918.5 billion in August. Total outstanding revolving debt has risen slowly from $839.5 billion in 2010, but the past of increase is accelerating as Americans seek credit to pay the bills.

Non-revolving debt, which includes student loans and other long-term liabilities, also saw a large rise, up 10.5% in September on a year-over-year basis, after rising just 5.7% in August. The total non-revolving debt of $2.574 trillion has risen 42.4% since 2010, and it expects to increase throughout the rest of the year.

One of the largest drivers of credit growth remains student loans, which have risen to $1.3 trillion in September after only breaching the $1 trillion mark in 2012. Student loans, which cannot be discharged or forgiven in bankruptcy, have risen to become the largest type of credit in the market, eclipsing even Federal government non-revolving debt.

Student loans have also eclipsed motor vehicle loans, which have surged in recent years and have passed $1 trillion for the first time in September 2015. Debt on cars has risen from $713.5 billion in 2010, according to data released Monday by the Federal Reserve.

Commercial Debt Stays Cheap

In part, consumers have been enjoying unusually low interest rates after the Federal Reserve cut its Fed funds target and kept it at the same level throughout the 2010s. An additional effect of this move has been to make commercial debt cheaper, which has in turn made it easier for companies to finance short-term obligations with bank-issued debt.

Rates for commercial paper have fallen to near zero, according to the Federal Reserve, meaning that interest paid on short-term loans by companies has become negligible. For instance, financial firms with an AA rating now pay interest rates as low as 0.07%, while lower-rated nonfinancial firms are still paying substantially less than 1% for commercial paper.

Future Rate Hikes

With growing reliance on debt from commercial banks and individuals in the United States, analysts are growing increasingly concerned that an interest rate hike could cause consumers to pull back on spending or even increase default rates as the new higher interest rates catch them off guard.

However, more economists are becoming confident that an interest rate hike in December is becoming likely. With strong jobs growth posted in October, Goldman Sachs Chief Economist Jan Hatzius said a rate increase in December is “very likely,” while analysts from several other investment banks wrote similar notes after the release in agreement.